A collection of graphic representations of data by CEPR researchers on important economic issues.

Equipment and Software Investement Share of GDP, 2004-2011

April 28, 2011

Investment in equipment and software maintained strong growth in the first quarter, rising at an 11.6 percent annual rate. Equipment and software investment were equal to 7.4 percent of GDP in the quarter, just 0.5 percentage points below the pre-recession level. This is remarkably strong given the amount of excess capacity in most sectors of the economy. It is likely to remain healthy throughout the year as the investment tax credit pulls investment forward; however, it may not sustain its double-digit growth rate.

In February, housing price declines were spread more evenly through the housing market than was the case in prior months; although the bottom tier continues to disproportionately suffer from the end of the first-time buyers tax credit. In Denver, prices for bottom-tier houses fell 1.4 percent in February and have fallen at a 17.9 percent annual rate over the last three months. In Chicago, they fell 4.7 percent in February and have fallen at a 28.4 percent rate over the last three months. In Minneapolis, prices in the bottom tier fell 6.5 percent in February and have fallen at a 42.8 percent rate over the last three months.

On the other hand, prices for homes in the bottom tier in Atlanta actually rose 0.6 percent in February; although they are still down 29.4 percent from their year-ago level.

The price of capital goods imports fell 0.1 percent in March. More than three-quarters of this index is nonelectrical machinery, the price of which has been virtually flat for two years. It should be noted that the general fall in the price of nonelectrical machinery over the last decade is due to falling computer and semiconductor prices — a steady decline of about 45 percent since early 2001. By contrast, the prices of capital goods excluding computers and semiconductors have risen 1.4 percent per year over that time.

While the recent acceleration in job growth is encouraging, it is still an extremely weak recovery from a downturn as severe as we have just experienced. Based on the experience of the last two severe recessions, 1974-75 and 1981-82, we should be expecting job growth in the range of 400,000 a month. Instead, we are still seeing a rate of job growth that is below the 250,000-a-month average from the 90s.

The plunge in new home sales in February caught the attention of many reporters and housing analysts. The 250,000 annual rate of sales reported for the month is by far the lowest on record and is down by more than 80 percent from levels reported in 2005 near the peak of the bubbles. The decline in new home sales have been even more severe in the West and Midwest, where they are down by 87 and 88 percent, respectively from their bubble peaks.

While these declines are dramatic, they are not unexpected. The bubble prompted an enormous building boom, which led to a massive over-supply of housing. A major part of the correction process must be a sharp reduction in the homes being built each year, which we have seen. The February number for starts of single-family units was down almost 80 percent from the peak of the boom. After a period of weak construction, supply and demand will eventually come back into balance.